Zetsche’s Next Term Turns on Closing 220,00 Mercedes Gap

Daimler’s supervisory board will meet Feb. 21 and probably extend Chief Executive Dieter Zetsche’s contract by five years to the end of 2018, according to a person familiar with the matter. Photographer: Photographer: Jason Alden/Bloomberg

Feb. 5 (Bloomberg) -- Daimler AG’s board is set to extend
Chief Executive Officer Dieter Zetsche’s contract by five years,
handing him the chance to deliver on his goals or risk the
Mercedes brand falling further behind its competitors.

Daimler’s supervisory board will meet Feb. 21 and probably
extend Zetsche’s contract to the end of 2018, according to a
person familiar with the matter, who asked not to be identified
because the discussions are private. Zetsche, 59, took over
seven years ago and unwound the empire-building strategy of
predecessor Juergen Schrempp.

During his next term of office, Zetsche has to close a
220,000-car gap to Bayerische Motoren Werke AG to make good on
his promise of taking back the sales lead and boost
profitability after twice missing a goal to do so. Daimler’s
fourth-quarter earnings are forecast by analysts to have
declined 14 percent, versus a 22 percent increase at Munich-based BMW and a 15 percent gain at Volkswagen AG.

“Daimler may have gone precisely nowhere in recent years,
but it probably would have gone bankrupt without him getting
them out of Chrysler” before the carmaker was bailed out by the
U.S. government in 2009, said Max Warburton, an analyst at
Bernstein Research in Singapore. “He needs to find a way to
ensure Mercedes makes cars that people want to buy again.
Without that, Mercedes’ independent future becomes less
certain.”

When Zetsche took charge, the manufacturer was laboring
under Schrempp’s expansion. A failed merger with Chrysler, an
aborted rescue of Mitsubishi Motors Corp. and the uncomfortable
role as the German government’s voice at European Aeronautic
Defence & Space Co. overshadowed Mercedes, the main profit
maker. After agreeing to exit EADS in December, Zetsche doesn’t
have any of those distractions left.

Losing the Lead

The extension of his contract shows the board’s confidence
in Zetsche’s strategy to regain the lead in luxury-car sales
that it lost to BMW in 2005. Adding insult to injury, Mercedes
dropped to third in 2011 behind Volkswagen AG’s Audi, once an
also-ran in the segment.

Daimler shares have fallen 17 percent over the past five
years, cutting the company’s market value to 45.2 billion euros,
while the shares of VW and BMW have doubled. This Thursday’s
profit report probably won’t do much to change investors’ view.

Fourth-quarter earnings before interest and taxes are
expected to decline 14 percent to 1.88 billion euros, according
to the average estimate of eight analysts surveyed by Bloomberg.

Mercedes Man

The latest slip means Daimler, also the world’s largest
maker of heavy-duty trucks, will post an operating margin of 7.3
percent for 2012, trailing BMW’s 10.8 percent. Daimler is still
set to beat the 6 percent margin at VW, which controls
truckmakers MAN SE and Scania AB.

Zetsche, a 36-year Daimler veteran, took over from Schrempp
in 2006, three months after his appointment as head of the
Mercedes division. He has retained that job ever since in a sign
of the importance of the company’s roots in carmaking after
Schrempp and CEO Edzard Reuter sought to dilute Daimler’s
reliance on luxury autos.

The focus on Mercedes is set to become evident in the
coming years. Kicked off by the revamped A-Class compact --
Daimler said the “A” stands for attack -- the carmaker has
vowed to roll out new models to fill gaps in its lineup and
outpace growth at competitors. Daimler’s plan calls for
overtaking its rivals in sales and profit by 2020 at the latest.
It will be a tall order to fill.

“Daimler is still lacking a competitive spirit,”
Christoph Stuermer, a Frankfurt-based analyst with market
researcher IHS. “It’s a company very much focused on itself.”

Missed Goals

Those internal distractions of realigning the company
contributed to Mercedes falling further behind last year.
Deliveries of the brand rose 4.7 percent to 1.32 million cars
and sport-utility vehicles. Sales of the BMW nameplate climbed
12 percent to 1.54 million vehicles. Audi delivered 1.46 million
autos, also a 12 percent gain.

On top of lagging sales, Zetsche last year postponed a
profit target for the second time. Mercedes will now reach a
goal of generating an Ebit margin of 10 percent of sales in 2014
at the earliest, at least four years later than originally
planned. The latest slipup hasn’t knocked the confidence in him
from former colleagues.

“If there is anyone who can lead Daimler to future
success, it’s Dieter,” said Tom LaSorda, who worked side by
side with him when Zetsche led Chrysler from 2000 to 2005, when
it was part of Daimler. He is a “true natural leader who can
lead, coach and drive for results.”

S-Class Strategy

The turnaround will be based on 10 additional models,
including the CLA compact four-door coupe and four other entry-level models to appeal to younger drivers. To underscore its
position in the upper end of the segment, Mercedes plans to
double the number of variants of its S-Class flagship to six
after it overhauls the model this year.

Zetsche has also moved to address sluggish growth in China,
appointing Hubertus Troska to a new board position overseeing
operations in the world’s largest car market. He also merged two
Chinese sales units to streamline operations and agreed to buy a
12 percent stake in the car unit of Chinese partner Beijing
Automotive Group Co. to push growth.

“Zetsche brought the Mercedes brand back to the
forefront,” said Jean-Marc Gales, head of European auto-supplier group CLEPA, who worked as global sales director at
Mercedes from 2006 to 2009. “He’s very competent. It’s very
rare in our business that the best suggestions come right from
the top.”